Ben Bernanke’s prepared testimony for his appearance before the House Financial Services Committee on Wednesday makes a case for the continued independence of the Federal Reserve, at least as far as bank regulation is concerned.
The Fed chairman is out to fend off a $50bn threshold for the Fed’s supervisory ambit, as proposed by the redrafted regulation bill from the office of Senator Chris Dodd.
The proposals would sift through about 5,000-odd bank holding companies and 800 state banks currently looked after by the Fed, leaving it with… thirty-five, according to American Banker.
Here’s the Fed defence, part one – which can be summarised as ‘we’re the experts in financial complexity, wherever it appears, so leave the regions with us’ (emphasis ours):
…the supervision of large, complex financial institutions and the analysis of potential risks to the financial system as a whole require not only traditional examination skills, but also a number of other forms of expertise, including macroeconomic analysis and forecasting; insight into sectoral, regional, and global economic developments; knowledge of a range of domestic and international financial markets, including money markets, capital markets, and foreign exchange and derivatives markets; and a close working knowledge of the financial infrastructure, including payment systems and systems for clearing and settlement of financial instruments.
No other agency can, or is likely to be able to, replicate the breadth and depth of relevant expertise that the Federal Reserve brings to the supervision of large, complex banking organizations and the identification and analysis of systemic risks.
The defence, part two — ‘we need to supervise everyone in order to be a better central bank’ (emphasis ours again):
…involvement in supervising banks of all sizes across the country significantly improves the Federal Reserve’s ability to effectively carry out its central-bank responsibilities. Perhaps most important, as this crisis has once again demonstrated, the Federal Reserve’s ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has as both a bank supervisor and a central bank. Not only in this crisis, but also in episodes such as the 1987 stock market crash and the terrorist attacks of September 11, 2001, the Federal Reserve’s supervisory role was essential for it to contain threats to financial stability.
Hmm. Paul Volcker will also be tag-teaming with Bernanke to defend the Fed’s regional role, according to BusinessWeek.
But does either argument really scream out for the Fed to go on supervising small and regional banks across America?
After all, the top 35 or so banks arguably have been the main sources of systemic risk, and are likely to remain so. The bill also plans to reform the New York Fed’s role in the central bank’s supervisory system to reflect this concentration of risk, as detailed by Reuters.
But is that such a good idea? In these post-Lehman, post-Repo 105 times, perhaps it’s in fact a backward step to leave Fed policy makers to rely even more on the NY Fed.
Consider the NY Fed’s highly questionable record over its supervision of Lehman, and of AIG, for example, or its role as the de facto rule maker for derivatives markets.
Discuss, as they say.
Related links:
What does the Dodd bill mean for commodities regulation? – FT Alphaville
Repo 105 – FT Alphaville
Poachers Turned Gamekeepers – The Epicurean Dealmaker